Natural Gas: Fundamental Balances Are Tightening, Go Long

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Includes: BOIL, DGAZ, KOLD, UGAZ, UNG, UNL
by: HFIR Energy
Summary

EIA reported +102 Bcf for the week ending June 7. This was in line with our forecast of +102 Bcf and lower than the consensus average of +110.

For the week of 6/14, we have a preliminary estimate of +97 Bcf. EOS is now 3.63 Tcf.

We are now in our full-sized UGAZ position as we bought the other 50% exposure today.

June to July transition shows a warmer-than-normal outlook, which should push CDDs above the norm. This is bullish as it pushes power burn demand higher.

Lower 48 production continues to struggle, indicating summer balances may be much tighter than we projected. We see near-term upside to $2.50.

Welcome to the tightening edition of Natural Gas Daily!

This week saw EIA report +102 Bcf for the week ending June 7. This was in line with our forecast of +102 Bcf and lower than the consensus average of +110 Bcf.

Source: EIA

Next Week's Estimate

For the week of 6/14, we have a preliminary estimate of +97 Bcf. EOS is now 3.63 Tcf.

Trading Position

We went long our full-sized UGAZ position today.

Fundamental Balances Are Tightening, Go Long

On Tuesday, we wrote an article titled, "It's time to turn bullish." At the time, we were only long 50% of our desired UGAZ position. But since then, a number of things changed.

  • EIA reported a storage build in line with our estimate indicating our view that lower 48 production around ~89 Bcf/d is correct.
  • Weather models turned more and more bullish for the transition between June and July.
  • Power burn held up today despite being one of the more bearish CDD days over the next 15 days.
  • And a technical breakout in the near term.

Technically, natural gas broke out of this descending triangle pattern today. TSI also is bottoming, and we think the near-term price target is around $2.50/MMBtu. We would likely take half of our exposure off depending on the outlook (HFIR subscribers will receive real-time alerts if we do).

On the fundamental side, we are seeing storage builds being revised lower despite neutral CDD projections:

This tells us that the market is fundamentally getting tighter as low natural gas prices boost power burn demand.

Lastly, lower 48 production continues to be flat, indicating to us that this summer may actually see production start trending lower.

Since the start of April, we are ~2 Bcf/d off from the highs. If this trajectory continues, then it echoes a much tighter summer balance than we had projected.

So, in our view, the short-term setup looks very attractive to the long side. Our view is that even in the face of a neutral weather outlook, prices should have upside to $2.50/MMBtu. If the weather turns bullish like what we are seeing right now, then we have more upside to that.

Given this, we think it's time to go long.

Disclosure: I am/we are long UGAZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.